Economics 101

I am certainly not an economist but the persistent embrace of fallacious principles by the Republican party compels me to share what I believe to be some basic economic tenets that history has validated.

This is very simple and basic. If you lose your job and have no money to spend, my income is reduced. Likewise if I lose my job, your income is negatively affected. For an economy to work properly, people must have jobs and money to spend. If people have jobs and are spending money, those entities providing goods and services will keep producing, keep hiring and paying employees, who will in turn spend their money and all the gears of the economic machine mesh and keep turning.

In the Great Depression, many people lost jobs, had no money to spend, demand plummeted and production of goods and services went down, causing more people to lose jobs, less money was spent, causing even more reduction of production, a “vicious cycle” causing economic recession and depression. The only solution during this horrible time was to “prime the pump”, to have the government be the employer of last resort, provide jobs to put money into the hands of consumers, who would in turn spend that money, causing the need for goods and services to increase, additional people to be hired and paid again, in turn spending more money, arrest the progress of the vicious cycle and cause the economic wheels to start turning again in the right direction.

Basic Principle Two. Inequality is bad for an economy.

It’s always interesting to note that back in the 1950’s through the 1970’s, the US economy boomed. There was a thriving middle class, unions were strong and everyone felt that their children would be better off than they were. Factory workers owned homes and cars, took vacations and sent their kids to college. Income taxes were progressive, with the very wealthy taxed at 90 percent. CEO top pay was approximately 30 times that of the average employee, not the 300 times typical today. When President Kennedy first cut top tax rates claiming that, “A rising tide lifts all boats” and when Reagan completed the job by reducing the top rate to 28 percent the trend toward our present serious inequality began and the economic foundation began to weaken. Why? The US has a consumer based economy so it does well when people have money to spend. When vast sums of money are transferred from the middle class to the wealthy, there is far less consumer spending. The wealthy do not buy the appliances and cars that keep the economy humming. They already have plenty of those. Their additional billions are banked and do not circulate in the economy. Thus, inequality harms a consumer based economy like ours.

Perennial Republican candidate Mitt Romney, like virtually all Republicans, claimed that tax cuts for the rich help the economy because “the job creators would have more money to invest in and expand their businesses and would hire more workers, etc, etc.” No, sorry, tax cuts for the rich do not work this way. Businesses expand when there is increased demand for their products and services. And demand for products and services increases when the people who buy these things have more money to spend. An economy works best when inequality is minimized, producing a huge middle class earning and spending good money and there is minimal money sitting idle at the top.

Basic Principle Three. The “free market” needs controls. Unfettered capitalism will eventually feed on itself and die if not regulated.

The “free market” is not self-regulating, as we would like to believe. If corporations had their way in their never ending quest to maximize profit, they would pay their employees less and less to make more and more profit. And if this reaches its logical conclusion, then soon no one could afford to buy the products and services provided by corporations and the corporation would cut production, close factories, further limit services in order to save money, and would further cut pay or fire employees. Soon since no one would could afford to buy its products the corporation would die, killed by its own relentless quest for profits in exactly the same way that a parasite eventually kills the host that feeds it.

From this little scenario it should be clear that corporations need to pay their employees well. This is best done by not relying on the largesse of the employer but by strengthening unions so that good pay and job security for workers would be guaranteed and that providing this pay and security would be an integral part of every company’s balance sheet. Heeding strong government regulations to ensure that companies provide safe working conditions for their employees and produce safe and high quality products should also be part of every corporation’s business plan.

Strong government and strong unions are required to counter the overwhelming strengths of corporations as John Kenneth Galbraith’s “Theory of Countervailing Power” made clear. Unfortunately our government has allowed unions to become decimated, correspondingly strengthening the power of corporations. Government too has become weaker, allowing mergers that would have been unthinkable a few decades ago and allowing rules and regulations to be attacked and weakened.

And finally, the government should always be the “employer of last resort”. Everyone able and willing to put in a day’s work should receive a fair living wage in return for that work.

Basic Principle Four. “Reaganomics” didn’t work, won’t work and will never work.

This set of principles is unfortunately alive and well today. It’s hard to believe that “trickle-down” and “supply side” economics are still solid pillars of Republican orthodoxy. Yes and Republicans are still believing in “the Laffer Curve”. And prominent Republicans like Paul Ryan are still reading and worshiping Ayn Rand.

Tax cuts do not “pay for themselves” as Arthur Laffer and other supply side economic gurus would have us believe. The present ongoing failure of tax cut experiments in Wisconsin and Kansas are living proof of this. And the experience of other states, like my own home state of Arizona, cutting progressive income taxation in favor of regressive sales taxes has slowed growth and seriously reduced state revenues.

“Cutting entitlements” or raising the Social Security retirement age or “means testing” for Medicare, are not the answers. The payroll tax that funds Social Security is not a progressive tax. Income above $118,500 escapes the payroll tax altogether. Simply abolishing this ceiling and assessing the payroll tax on all income would solve Social Security’s problems for the next sixty years. Raising the retirement age is a “solution” concocted by people making a living sitting on their fannies because anyone who does physical labor for a living will tell you that “raising the full retirement age” for Social Security is not at all realistic.

And finally, distinguishing between “makers” and “takers” is fallacious. Among the biggest takers are American corporations, many of which totally escape corporate income tax because of dozens of loopholes.

Basic Principle Five – It is ok for the Federal Budget to run a deficit.

I am really tired of Republican fiscal hawks wringing their hands and waiting for the sky to fall over the federal debt and infamous national debt “clock” and the ubiquitous bad news graphs and diagrams about budget deficits. Also I am tired of those same people saying we need a “balanced budget amendment” in our constitution. And another common refrain from these “deficit scolds”, as NY Times columnist Paul Krugman has labeled them, is comparing our Federal budget to one’s household budget – “No household can continually spend more than it takes in, and neither can the federal government”. The two are not in any way the same and in fact are radically different.

Household and personal debt both face a day of reckoning – when the notes become due or when you die and the debts have to be paid or discharged. Our federal government has existed for 221 years and has been in debt for about 218 of them. And the federal government has run budget deficits for about 190 of those years. And the government is still in debt and it’s still running just fine. No “day of reckoning”. Furthermore, I don’t know of any household that can mint and print its own money, establish its value, impose taxes….and collect them in those same dollars.

Yes, the debt can perhaps grow too big and perhaps become less manageable. But we’re not anywhere near that point. As a percentage of GDP our federal deficits and total debt right now are really quite modest. And a “balanced budget amendment” for our federal government would be its death knell. The federal budget needs the flexibility to inject money into the economy if necessary to fight recession. And it needs the flexibility to borrow heavily for other needs of common benefit. Such a limitation would be deadly for the country and our economy.

Basic Principle Six – Paying taxes is ok, being taxed is ok, we need taxes to run federal, state and local governments .

This simple statement runs counter to Republican dogma, which says that taxes are too many and too high – abolish the corporate income tax, abolish capital gains taxes, lower income tax rates or abolish the income tax altogether, replace it with a value added tax, or a national sales tax or at the very least establish a simple flat tax, or a combination of some or all of the above. Republican anti-tax guru Grover Norquist wants to starve the government of taxes “… to get it down to the size where we can drown it in the bathtub.” and has incredibly anointed himself with enormous power by extracting his “pledge” of “no new taxes“ from a majority of members of congress.

Listen, we need taxes. Taxes have been paid to governments from time immemorial – from farmers providing the Pharaohs with a portion of the grain they have grown, to peasants paying the local duke or prince a portion of crops or animals grown on land rented from said potentate. Presently we are the least taxed of any developed country so we need to stop complaining about high taxes. Do we need to improve our system of taxation? Of course. Loopholes in personal and corporate income need to be closed. The wealthy and corporations need to pay their fair share. Does the government need to spend money more wisely? Of course. A blank check for the Pentagon (with no auditing) every year, trillions wasted on destructive, tragic and futile wars and $8 million a day for a wealthy country like Israel are stupid. But do we need taxes? – of course we do.

Right now, with low oil prices, we desperately need to raise the fuel tax and use that money to repair our crumbling infrastructure. This “user fee” has always been the most rational and sensible way to build and maintain our transportation infrastructure. But instead, our “no new taxes” Congress has chosen instead to fund much of the new Highway Bill with a mishmash of crazy and unreliable sources totally unrelated to the “user fee” concept.

Finally, I am tired of hearing politician after politician referring to “your tax money”. No, it’s not our tax money, it is the government’s tax money. Part of whatever I have earned from the time I started working at 16 years old has been the government’s money. And that’s ok.